Arcelor moved to escape the clutches of Mittal Steel yesterday by unveiling plans to buy the rival Russian steel maker Severstal for €13bn (£8.9bn).
The deal, if it comes off, would turn Arcelor into the world's biggest steel producer and make Alexey Mordashov, the Russian oligarch who controls Severstal, its biggest shareholder with a 32 per cent stake. It would also make the Luxembourg-based company bid-proof as Mr Mordashov has undertaken not to sell any of his shares for five years.
The deal represents Arcelor's latest attempt to evade Mittal. It has already sought to frustrate Mittal by ringfencing its North American assets so that they could not be sold off in the event of a takeover. It then promised to hand back a quarter of its capital to shareholders. Mittal, which raised its offer for Arcelor to €37.74 a share last week, valuing the company at €26bn, brushed off the latest manoeuvre, saying it remained convinced that its bid would succeed.
Arcelor claimed that the merger with Severstal would value Arcelor shares at €44 - double the price they were trading at in January before Mittal made its bid and a 37 per cent premium to its closing price on Thursday.
However, Arcelor shares closed €1.27 down yesterday at €32.79 as analysts questioned the valuation it put on the merged company. Commerzbank said it continued to recommend the Mittal offer but Standard Life, which holds just under 1 per cent of Arcelor, said the Severstal deal represented better value.
Mr Mordashov, who controls 90 per cent of Severstal, will receive 295 million Arcelor shares in return for his holding in the Russian steel maker. He will also contribute €1.25bn in cash along with his shareholdings in the Italian steel company Lucchini and Severstal's mining interests.
The takeover of Severstal will go through unless more than 50 per cent of Arcelor's shareholders vote to block it at a special meeting at the end of June. However, the deal is still conditional on Mittal's bid not succeeding. Mittal's bid closes in early July and it needs the support of a simple majority of shareholders. Even if Mittal fails to gain control of Arcelor but still manages to acquire a significant minority of the shares, Mr Mordashov is entitled to walk away.
A combination of Arcelor and Severstal would be the world's number one steel maker with production of 70 million tonnes a year and 22 per cent of the global automotive steel market. Around 40 per cent of its operating profits would come from the low-cost countries of Russia and Brazil.
Guy Dollé, the chief executive of Arcelor, said that it had begun discussions about a strategic alliance with Severstal as along ago as October 2002. However, he admitted that the takeover approach in January this year from Mittal had acted as a "catalyst" in their merger talks.
Arcelor said that it still intended to go ahead with a €5bn buyback of shares which will reduce the amount of shares in circulation by a quarter. Assuming Mr Mordashov did not take part in the buyback, then his stake would rise to 38 per cent. He has undertaken, however, not to further increase his shareholding for four years.
Mittal said that if the Severstal takeover went through, it would result in Mr Mordashov gaining creeping control of Arcelor, adding that part of the deal involved giving him control over future strategy.
Arcelor responded by saying that it would still control 68 per cent of the shares, take the chairman and chief executive roles in the enlarged company and nominate the majority of the directors.
A bear-hug from the oligarch Alexey Mordashov
By Andrew Osborn in Moscow
Severstal has long been one of Russia's most successful industrial conglomerates, a state of affairs that has turned its bear-like director general and shareholder-in-chief Aleksey Mordashov into a billionaire.
The 40-year old owns 90 per cent of Severstal, with an estimated fortune of £4.5bn.
Mordashov is a Kremlin loyalist and, compared with some of the oligarchs who made their fortune in the anarchic 1990s, he has an uncontroversial reputation. He did not use force to wrest control of Severstal when it was privatised in 1993, but his wits. As the company's finance director, he bought up the bulk of the plant's shares for himself through a sleight of hand that was questionable but not illegal.
He was born in the Vologda region of Russia, nearly 400 miles north of Moscow, where Severstal's Cherepovets steel mill is located.
It is in Cherepovets that the conglomerate produces the majority of the almost 13 million tonnes of crude steel it produces every year. In 2004, Severstal posted a net profit of $1.4bn (£0.75bn) and sales of $6.6bn.
The company is the biggest supplier of steel to Russia's car manufacturing industry and since 1996, when Mordashov became its director general, Severstal has bought iron ore and coal mines, port facilities, car makers, railway companies, and branched out into banking and insurance. It has a facility in the United States, Severstal North America, and an existing agreement with Arcelor to cooperate in the production of galvanised steel.
Built after the Second World War, the Cherepovets plant became fully operational in 1959 and started breaking even three years later. Almost five decades on, it is a legacy that has allowed Aleksey Mordashov to challenge for a huge stake in what will be the world's largest steel maker.Reuse content